Get With The Plan: August 9, 2009

With a whopper income, Edna and George may seem to be financially without worry, but even those with larger paychecks could find ways to improve their situations.

The couple, both 47, have concerns about making sure George’s generous employer retirement benefits are invested properly for retirement, and like most people, they want financial security for today and for the future.

“Our biggest financial concern now is to have a financial cushion large enough to weather the current economic storm,” Edna said. “We have two kids in private school and college is just around the corner, so we would like to be able to afford these things and support our lifestyle.”

Edna and George, whose names have been changed, have saved $355,890 in a profit-sharing plan, $22,050 in a 403(b), $48,461 in IRAs, $35,750 in a brokerage account, $21,300 in mutual funds, $27,623 in cash accounts and $32,800 for college for their two children, ages 17 and 14. Additionally, George’s employer funds an additional retirement plan — a Supplemental Executive Retirement Plan, or SERP — which today guarantees an annual income stream at age 60. The longer he works there, the larger that benefit will be.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple assess their situation.

“The family is making a good income,” said Lynch, but that doesn’t mean they’re set for life. “This all comes down to one thing. They need to make savings their priority.”

First, Lynch examined their cash flow, and saw they’re only saving about 4 percent of income.

“Generally speaking, people have a tendency to live up to their incomes, no matter what the level of income, and the only way to really combat this is with discipline and taking the money off the table before you have a chance to spend it,” he said.

Edna and George need to up their savings rate to 10 percent or more, so they need to examine their expenses and make decisions on where to cut. Lynch said they need to look at spending, develop a realistic budget, stick to it and start saving more.

“In order to be financially successful, you need to save. How many movie stars and athletes do we hear about who are dead broke as they spent everything that they made and had nothing left in a very short time?” he said.

Lynch said the couple spend about $21,000 a month, so they need to set aside six months’ worth of expenses, or $126,000. These days, Lynch said, having a cash buffer is not a luxury but a necessity. The couple have some money in taxable accounts, but accessing those funds in an emergency could mean selling the investments at a loss.

“You can lose your job, get hurt or sick, die, be sued,” he said “In addition, market values can drop and without cash, people with assets and no liquidity are forced to have fire sales just because they need cash. Having cash is not sexy or glamorous, but it is the foundation of any solid financial plan.”

For college, the couple haven’t saved enough, and one of their kids is only one year away from college, which will cost between $30,000 and $35,000 a year. The good news is they can redirect their current spending for private high school for college tuition, so they’ll only need an additional $11,000 a year for college costs.

George is in a good place, as his company has a very generous retirement benefit. He will also get medical benefits for life after age 55 for him and for Edna.

While the benefits are rich, Lynch warned that these types of plans potentially have a big drawback: the funds could be subject to creditors in the event that the company liquidates. Qualified plans, such as pensions and 401(k) plans, are not.

“If his company ever goes bankrupt, such as with Lehman Bros., Enron, Sharper Image and others, this can potentially mean that their benefit can be worthless,” Lynch said.

If the company stays healthy, the couple will be in good shape. But Lynch worries this promised retirement income has too many “ifs.” What if the company cuts its profit-sharing plan or freezes the SERP plan? What if the company goes under and the SERP is now an attachable asset? What if George’s boss is a jerk and he decides he can’t work there anymore?

“They need to have more savings outside the company that are not related to the company,” Lynch said. “They are almost living paycheck to paycheck on a tremendous income. They simply have to make it a priority to save more.”